We are sure that the history books of the year 2035 are going to talk about 2020 in an extremely different manner. Apart from Covid, stock market boom, there will be a chapter on NFTs for sure. Who knows, NFTs may be so mainstream by then, that the origin of NFTs is a different subject altogether. Let us try to imagine how that chapter would start.
It was year of the decade of 2020. People were paying for JPEGs of monkeys and pixelated folks. Then, every sports personality, movie star and tom dick and harry started minting these images. While 30 year old’s struggled to reach office in time, 16 year old’s were making millions by flipping these images.
It is already hard to make sense of what is happening in the market right now. Imagine how it would fare for a generation who would have seen NFTs as a part of their daily lives. So this brings us to a bigger question. If digital art use case is so frugal, why are NFTs so expensive? Where is the entire value in this chain? Are we as normies (someone not from cryptoverse) missing out on something? Well, that is pretty much what we are going to discuss today.
What is a NFT?
NFT stands for non-fungible token (we know that you know that already). Fungibility is the property of an object to be exchanged with other objects of similar kind. Think of currency. A dollar bill can be exchanged with another dollar bill with no change in net value. But NFTs are different. This gives NFTs a very specific set of properties as follows:
A. Unique:
NFTs are one of a kind. One can argue that we can copy paste any of the monkey images out there. Yes you can. But that is not what NFT is. That is just the front end. Think of it as an outer wrapper of a candy. The candy inside holds a lot of value. It is not the wrapper that matters.
In this example candy is a record on Blockchain that says this NFT belongs to you. Since Blockchains are immutable and no one can change them at will, this record is completely safe and cannot be tampered with.
This means no matter whosoever copies that NFT, you are still the rightful owner of it. This may not make sense when it comes to digital profile picture based NFTs, but it is extremely valuable for other use cases.
B. Non-Interchangeable
Coming back to the example we took earlier. If you have a $1 bill and exchange it with the other, it would make no difference. Another corollary of this would be that if you have a $50 bill and someone exchanges it with 5 bills of $10 each, there would still be no difference in net worth of the exchanging individuals.
NFTs are on the opposite end of the spectrum when it comes to this aspect. Imagine that you own an art piece by Picasso and your friend has one by Da Vinci. Would you be able to exchange them? You could get into a barter deal, but each one of these paintings have a very specific speculative value in the mind of the buyer.
C. Traceable:
Thanks to the Blockchain technology, once you purchase an NFT, you sort of engrave your name in the Blockchain against that asset. So whenever someone is selling an NFT, one can track the entire ownership history of it.
This becomes extremely helpful to make sure that your purchase is legit or not. Secondly, it comes in really handy when someone is trying to trace the origin of something they have purchased.
D. Smart Contractible:
Do not fear the jargon. This is just another way of saying that NFTs are programmable. When an NFT is minted, creator can input a set of pre-conditions governing it. For example, a creator of a digital painting might create a royalty of 10% for himself with every subsequent purchase. This would have never been possible with the physical art work.
Why are NFTs So Expensive?
For understanding why people are paying millions of dollars to buy monkey NFTs, we need to understand that what NFT is all about.
As discussed above, when you purchase an NFT, you get your name written in the ‘owner’ column in the Blockchain. Obviously this is an oversimplified version of what is happening but this is what it is.
People want to pay for that proof of ownership and not the image. Image is just an add on. Something that gives them the rights to brag. If someone copies it, they can flex about the power of NFTs even more.
But then, why are NFTs so expensive even after that? Well, that is what we plan to discuss in this section. This will not only help you understand why NFTs are so expensive, but also give you a framework to value any NFT for your future purchases.
4 reasons why NFTs are valuable:
Enlisted below are a few a reasons that are driving the prices of any NFT in the market. Read on:
A. First:
Mankind has always cherished ‘the first of its kind experiences’. Be it your first steps as a kid, your first salary or your first kiss. It is always something worth remembering. Anything that is first, does hold a lot of value for us.
Which is why, NFTs that are first of its kind are extremely valuable. When the NFTs were still not mainstream, a company called Larva Labs created ‘Crypto Punks’. A set of 10,000 pixelated images of a unique character. Each NFT is different from the other in terms of characteristics.
This is why you would often find Crypto punks in the list of top 10 most expensive NFTs sold.
Same is the case with Bored Ape Yatch Club (BAYC). Yes, it is the same monkey we have been talking about. So BAYC was one of the fist NFTs that was aimed to create a community of the holders with physical meet ups. Which is why it became a huge hit.
B. Utility: Real World Benefits:
This is probably the most powerful factor to consider while purchasing an NFT. If any NFT is tagged with a real world benefit, something tangible, it is much easier to value them.
Why? Because now you can equate it with the value of the real world object it offers.
Recently, famous media influencer Gary Vaynerchuk, launched a project called ‘vee friends’.
This NFTs had some drawings that he sketched by hand. While mainstream media talked about the fact how Garyvee is making millions by selling oddly made elephants and ants, the truth is that he added massive utility to those NFTs.
For example, each of that NFT could be used as a ticket to his annual conference (which already is very expensive). Some of the NFTs also included exclusive 1:1 with Garyvee.
We would definitely see a boom in the NFTs that carry a real life world value, in the future.
C. Unique and Rare:
Our obsession with rarity and uniqueness is not new. If this wasn’t the case, we would not have such a thriving diamond industry. It is literally an abundant piece of rock that is artificially inflated by making people think that its supply is rare.
Anyway, this principal applies to NFTs as well. Let us understand this with an example.
Imagine that Lionel Messi plans to enter into the NFT world. He decides to mint 3 copies of his winning goal in the World Cup. That would instantly accrue value.
Why? Not because that image/video is rare. But also because it is minted by Messi himself. He might decide to add in his autographs in the image and that would increase the value further more.
D. Ownership History:
Another interesting metric to value NFTs. Tracking the ownership history in the physical world can be quite daunting. There is a paper trail (if at all) to follow, legalities, bureaucracy and what not.
Thanks to the Blockchain technology and NFTs, it is extremely easy to do in a digital space.
This means one could find out the previous owners of the NFTs that they are purchasing. Now imagine if the NFT you are getting into was held by a famous personality previously. It would instantly become very valuable. Of course this is subjective to the buyer, but it would definitely bump up the prices.
As an example, recently Justin Berber purchased a bored ape. Now if at all he sells it, all subsequent purchases would accrue value because Justin held it once. All teenage girls would be willing to pay a huge sum for it.
Should I Start Purchasing NFTs Now?
Well, this was never a financial advice to begin with, but you are equipped with a high level framework of valuing NFTs. However, it’d be better to be sure before stepping your foot into this space.
95% of NFTs out there are bound to crash and fail. And believe it or not, this is a conservative number at best. It could only go upwards. Final decision is still yours.
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Until next time..
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